The Lame Duck, Debt Limit and the Fiscal Cliff = The Perfect Storm

Many have been thinking about the pending “Fiscal Cliff” of expiring tax cuts and defense spending cuts that the United States is scheduled to hit at the end of this year. This cliff will come at the same time that there is expected to be a request to hike the nation’s borrowing authority. Add all of these issues together and you get a perfect storm of big government ready to hit Americans in the checkbook.

It's becoming increasingly likely that this presidential election will be so close that it may not be decided on election night. If this election is challenged like 2000, and there is a long process before we know who the president is, it is impossible to predict how Congress deals with the Fiscal Cliff. Also, if President Obama loses, will he step aside and let the new Romney Administration try to navigate a deal; or will he be active in trying to deal with the Fiscal Cliff up to Romney’s inauguration?

The Wall Street Journal describes the Fiscal Cliff as “a total of $500 billion in annual tax increases and federal spending cuts set to begin in January.” The Budget Control Act of 2011 passed late last year aand set up a process for automatic cuts to spending termed “The Sequester.” Over the next ten years, $1.2 trillion is scheduled to be cut evenly from defense and domestic spending with an exemption for most entitlement spending. These cuts would hammer defense spending to the tune of about $600 billion over ten years starting with about a $60 billion cut in 2013.

The second element of the Fiscal Cliff are expiring tax cuts. There are numerous changes to tax law that are scheduled to hit Americans at the end of this year.  The Obama payroll tax cut and tax cuts from 2001/2003 are expiring. In addition a plethora of ObamaCare tax hikes are scheduled to kick in on January 1, 2013.  Also, there is a package of special interest tax provisions that traditionally are extended at the end of each Congress and other expiring tax provisions dealing with the Alternative Minimum Tax (AMT).

There is a new complication. Breaking news yesterday that the Department of Treasury is projecting that the statutory debt limit will be hit in December, adds to a perfect storm of politics. The AP reports that “U.S. Treasury officials say they still expect the government will hit the current debt borrowing limit at the end of this year.” A hike in the borrowing authority for the U.S. government is expected to be another item in the mix in Lame Duck.

If you mix up the sequestered cuts, tax hikes and debt limit, then you come up with a scenario where Congress will try to wrap all these issues into one messy package.

The WSJ predicted that “if Republican presidential candidate Mitt Romney is elected, GOP lawmakers will seek to postpone the big decisions until after he takes office next year.” It also may be true that Democrats will be motivated to cancel the post-election lame duck session if Romney wins, Republicans take over the Senate and Republicans retain a strong majority in the House. That scenario would make it more difficult to reinstate the 2001/2003 tax cuts, because of the way Congress scores tax policy.

The WSJ further predicted that “if President Barack Obama is re-elected, the White House and congressional Republicans would likely clash immediately because they disagree on many issues, particularly the Bush-era tax cuts that expire at year's end.”  Some on the left have adopted the mantra of “Cliff-Divers.”  Many left wing Cliff-Divers want Obama to allow all the tax provisions to expire and the defense sequester to be implemented as a means to force Republicans into a terrible deal in 2013. They believe this would give Obama the upper hand in forcing tax hikes on job creators.

A conservative deal would be to deal with the debt ceiling separate from the Fiscal Cliff issues of tax policy and scheduled spending cuts. Continue the 2001/2003 lower tax rates on all Americans and suspend the across the board defense sequester scheduled $60 billion in 2013 cuts while finding specific domestic programs to slash. Under any scenario, this policy outcome will be difficult in November or December.

Politicians just don’t understand the simple truth that government has a serious spending problem. A debate over the defunding of the Corporation for Public Broadcasting, and by extension Big Bird, shows that politicians in Washington, DC can’t even fathom cutting specific programs that fund entertainment programs for kids.

Conservatives need to remember two things. A post-election Lame Duck session shall allow unelected Senators and Representatives to cut deals that will impact the fiscal future of America for years to come. Also, liberals will use the fear of default to force conservative Republicans to violate their pledge to the American people not to increase the tax burden on private enterprise and hard working people. Conservatives need to make sure the Fiscal Cliff does not become a perfect storm for the allies of big government to use to raise the tax burden on all Americans.